I have only read one research paper of Saez on inequality in US. He shows that share of top 10 incomes has followed a U shape pattern from 1917-2006. The share of top 10% in total income reached its peak in 1920s and then declines post Great Depression and WWII. It then starts to rise around 1970s and suddenly jumps in 1990s. In 2000s the share moves higher than 1920s peak. The top 10% currently captures 50% of total US income!

What is also interesting is that he breaks the top decile in three percentiles and finds it is the topmost percentile which drives much of the rise. Hence, the inequality widening is mainly as the richest continue to grab more and more of the income pie.

Further

The 1993–2006 period encompasses, however, a dramatic shift in how the bottom 99 percent of the income distribution fared. Table 1 next distinguishes between the 1993–2000 expansion of the Clinton administrations and the 2002-2006 expansion of the Bush administrations. During both expansions, the incomes of the top 1 percent grew extremely quickly at an annual rate over 10.1 and 11.0 percent respectively. However, while the bottom 99 percent of incomes grew at a solid pace of 2.4 percent per year from 1993–2000, these incomes grew less than 1 percent per year from 2002–2006.

Therefore, in the economic expansion of 2002-2006, the top 1 percent captured almost three- quarters of income growth. Those results may help explain the disconnect between the economic experiences of the public and the solid macroeconomic growth posted by the U.S. economy since 2002. Those results may also help explain why the dramatic growth in top incomes during the Clinton administration did not generate much public outcry while there has been an extraordinary level of attention to top incomes in the press and in the public debate over the last two years.

Moreover, top income tax rates went up in 1993 during the Clinton dministration (and hence a larger share of the gains made by top incomes was redistributed) while top income tax rates went down in 2001 during the Bush administration.

He also explains that much of the decline in top 10% income was because of loss in capital income and much of the gain since 1970s has been because of rise in salaries and wages.

The labor market has been creating much more inequality over the last thirty years, with the very top earners capturing a large fraction of macroeconomic productivity gains. A number of factors may help explain this increase in inequality, not only underlying technological changes but also the retreat of institutions developed during the New Deal and World War II – such as progressive tax policies, powerful unions, corporate provision of health and retirement benefits, and changing social norms regarding pay inequality. We need to decide as a society whether this increase in income inequality is efficient and acceptable and, if not, what mix of institutional reforms should be developed to counter it.

The U shaped inequality curve reminded me of the research work by Thomas Philipon who said share of financial sector in total economy has followed a U shaped pattern since 1900s. It reached its peak around 1920s and starts to rise around 1990s. Then I remember a research on financial globalisation (cannot place the author) which also said that financial globalisation has followed a U shaped pattern in 20th century. Then I recall a lecture from Frank Levy which also looked at rising inequality in US. Levy said:

When we say that the top one percent of tax filers now receive something over 17 percent of all taxable income, it will not surprise you that a significant fraction of that top 1 percent comes from the financial sector.

The Levy paper was very interesting on inequality and said we need to bring back institutions to rising inequality.

Though Saez does not suggest n his paper whether finance is the main reason for rising inequality, I think answer lies there. I have to still read Saez’s work to see if he has done sectorwise work on inequality. I think this makes an interesting piece of research as wll- Linking all these U curves together.